Privity of Contract and Third Party Beneficiaries 2007

V. Options for Reform

[87] If reform of the doctrine of privity of contract is to be undertaken then four options are possible:

(A) Judicial Development of Third Party Rights

[88] The first option is not to do anything and rely on the courts to create any further exceptions to the doctrine of privity in relation to third party beneficiaries.[96]

Advantages

  • Flexibility - exceptions can be tailored to meet the specific situation of a particular case.

Disadvantages

  • As the Supreme Court of Canada observed in London Drugs, the development of the common law by the courts should be exercised generally in an incremental fashion.[97]
  • The court process is lengthy and dependant on the particular case before the courts.
  • There is also some uncertainty as judicial opinion can change over time.

(B) Legislative Exceptions in Particular Situations

[89] As discussed above, some statutory exceptions already exist and others could be developed to address third party beneficiaries in particular situations.

Advantages

  • Can address in detail particular needs in particular situations
  • Clear intent to confer an enforceable right
  • High degree of specificity and certainty in limited areas.

Disadvantages

  • Does not address the underlying problems with the doctrine.
  • Adds an additional exception to the patchwork of existing exceptions.
  • May impede further judicial reform.

(C) Abolish the Rule Preventing Non-Recovery by the Promisee of a Third Party’s Loss

[90] A general legislative provision could be developed that would permit a promisee to recover for a third party’s loss. The current difficulty, as discussed in Part II, is that where a promisee attempts to bring an action against the promisor for the benefit of a third party, the promisee is faced with the argument that he has not suffered any damages. The damages resulting from the promisor’s breach were to the third party, rather than to the promisee.

[91] In the U.K. a number of cases have dealt with the enforcement by the promisee of damages in favour of the third party.[98] There does not appear, however, to be any recent Canadian cases that dealt with the recovery by a promisee of damages for a third party. Some commentators assert that judicial developments in the U.K. in this area largely negate the need for the detailed Contracts (Rights of Third Parties) Act 1999.[99]

Advantages

  • Closest approximation to the Promisee’s intention.
  • Solves a number of the problems with privity without dislocating basic contractual principles
  • Avoids the complexity and necessity of resolving the numerous issues that arise in drafting a detailed legislative scheme, such as the test for enforceability of third party rights.

Disadvantages

  • An incomplete solution where the promisee is unable or unwilling to enforce a contract made for a third party.

(D) Adopt a General Provision that No Third Party should be Denied Enforcement of a Contract Made for his Benefit on the Grounds of Lack of Privity

[92] For a number of reasons, the Ontario Law Reform Commission favoured the enactment of a general legislative provision “to the effect that contracts for the benefit of third parties should not be unenforceable for lack of consideration or want of privity.”[100] First, it thought the courts should be given some flexibility in dealing with the variety of issues which would arise under any reform. Second, as third party beneficiary cases arise in a number of different contexts, it was thought that detailed legislation could not satisfactorily deal with all such problems. Anomalies were likely to occur if the same legislation were to apply to widely differing circumstances. Third, the problem of defining the class of beneficiaries entitled to sue and the question of variation and rescission were regarded as intractable.

[93] The approach recommended by the Ontario Law Reform Commission has not been implemented in Ontario and has expressly been rejected by law reform commissions in Manitoba, U.K., Hong Kong and Singapore.

Advantages:

  • Degree of flexibility in addressing the broad context of cases that arise.

Simple to implement, do not have to find normative solutions for a broad range of cases.

Disadvantages:

  • Leaves it to the courts to resolve difficult questions, such as who is a third party beneficiary, without providing any legislative guidance.
  • Incremental change - Like option 1, it is case dependent and the creation of exceptions can take considerable time to occur.

(E) A Detailed Legislative Scheme

[94] This option calls for the implementation of detailed legislation, like that adopted in Quebec, the U.K., Hong Kong, New Zealand, Western Australia, and Queensland. This approach is favoured by a number of law reform bodies including, Nova Scotia, Manitoba and Singapore. The legislative scheme would extend to all third party beneficiaries whether seeking to enforce their rights or use a contractual clause as a defence. This approach would also address other relevant issues such as: identification of a third party beneficiary; variation or termination; defences; and joinder.

Advantages:

Certainty and clarity would be achieved through the establishment of a coherent body of rules.

Legislature would fulfil its responsibility to provide normative solutions that would satisfy the majority of cases.

Disadvantages:

Lack of flexibility. There may be particular situations where the legislation does not lead to a just result.

Delay and complication associated with legislative amendment, where necessary.

[95] In considering the advantages and disadvantages of the various options for reform, the preliminary recommendation is to pursue option (E) a detailed legislative scheme to address this issue. This approach has been employed successfully in other jurisdictions and has the advantage of providing greater certainty and clarity than the other options discussed. While options (A) and (B) would provide greater flexibility, their approach is piecemeal and incremental. Option (C) provides an incomplete solution and option (D) effectively shifts the burden of resolving fundamental questions, such as who is a third party beneficiary, from the legislature to the courts.

Next Annual Meeting

2018 Conference (Centennial)

Delta Hotel

Québec City, QC

August 12 - 16, 2018